We came away from OLDTOWN’s 2Q15 results briefing feeling more comforted on their 2H15 prospects, underpinned by: (a) sales recovery in Manufacturing of Beverages (MB) division, (b) Aggressive promotion and product innovation in Café Chain (CC), and (c) A better 2H15 buoyed by festivities and holidays. Management also provided in-depth diagnosis of the 2Q15 results which was undermined by few temporary blips. Reiterate MARKET PERFORM with higher Target Price of RM1.79 (from RM1.76). We maintain our neutral stance on the Group despite the better earnings prospect in 2H15 driven by both operating segments in view of the persistent soft consumer sentiment and challenging operating environment.

A clearer picture of 1H15 numbers. Management clarified that the flattish revenue growth of 1.6% was due to the delay in planned execution of its MB division in regards with certification and licensing issues and the temporary closures of 28 outlets during the period for renovation and upgrading works. Sales volume is expected to recover in 2H15 with the hiccups in MB division being sorted out while the refurbishments in CC division have been completed.

Robust demand in MB division. 2Q15 MB sales declined by 5.3% QoQ due to several issues in relation to certification and licensing in Philippines, Indonesia, and Hong Kong; which the Group estimated revenue loss of RM3m. Meanwhile, the biggest export market, China saw lower sales (estimated RM6.8m) due to delay in marketing plan execution. However, all the issues have been addressed and OLDTOWN expects stronger numbers in the division moving forward. To date, the Group recorded commendable growth in the white coffee segment both locally (+12%) and overseas (Singapore 7%, Hong Kong 21%) while also sustaining its dominant market share (32.4%- 45.6%) in the markets.

Going aggressive and innovative in CC division. The Group has lined up aggressive marketing promotions in order to boost the sales. Cash vouchers and promotions with Groupon are envisaged to entice more customers in conjunction with the holiday season in the yearend and Chinese New Year. Meanwhile, OLDTOWN has also introduced new product of ‘White Curry Series’ starting mid-November in order to expand menu varieties to its customers. We gathered that the new product has been well received with average sales of 4,000 bowls per day, on par with the top selling dishes of CC outlets.

Fine-tuning earnings numbers. Post result briefing, we made changes to our earnings forecasts by factoring higher sales contribution from MB division, to be in line with the guidance. Besides, we also impute higher selling and distribution expenses to CC division in view of aggressive marketing campaigns, moving forward. As a result, FY15E-FY16E net profit forecasts were revised higher by 1.4%-1.6% on the back of higher revenue (5.4%-5.6%).

Reiterate MARKET PERFORM with higher Target Price of RM1.79 (from RM1.76). Correspondingly, with the earnings upgrade, TP was tweaked higher based on unchanged 14.1x FY16E PER, which is below 3-year mean PER. We maintain our neutral stance on the Group despite the better earnings prospect in 2H15 driven by both operating segments in view of the persistent soft consumer sentiment and challenging operating environment.

Source: Kenanga